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9/09/2009

Want Cheaper Health Insurance? Increase Supply

I recently read a Wall Street Journal article which explained the problem of interstate health insurance. It is currently prohibited to purchase health insurance coverage from a company in a state where you do not reside. This greatly reduces the number of options one has to secure the most cost effective plan. It would be impossible to obtain coverage by Select Med if I lived in New York.

Eliminating state boundaries would immediately increase competition which in turn would result in lower health insurance premiums. Increase the supply and the prices will fall. Competition is always a main driver for more affordable products and services. Let more companies fight for your business. Let pricing become a competition.

This is not a complete solution to the health insurance problem, but it will definitely increase its affordability.

7 comments:

Prohibiting interstate health insurance is a major factor in the lack of affordable health care. This prohibition allows companies within states to grow into monopolistic monoliths.

Where monopoly (or even oligopoly) reigns, prices are driven up and profits are maximized beyond what the average can afford to pay for goods or services.

That is one part of President Obama's health care plan that should be addressed. He is rightfully concerned about increasing competition between insurance companies through incentives for lowering costs, subsidies for those who cannot afford insurance, etc. If he were to allow interstate insurance coverage, it would be a lot easier to reduce insurance premiums because companies would be competing for millions of new customers.

I agree that allowing interstate competition among insurance providers would definitely make insurance more affordable. I believe this is what Massachusetts did, on a state level, when they reformed their health care system recently and it seems to be working quite well for them.

However, as an insurance salesman myself, I don't know if I necessarily want that or not. As it is, it is a nightmare to remember which insurance providers you are affiliated with, what their specific plans are, and how their rates differ compared to other options. If you add interstate competition into the mix then you will be putting many insurance agents out of work. Given the current climate for insurance, this is bound to happen anyway, but that's just my two cents.

Though I agree that competition typically breeds more attractive prices for consumers, I am not convinced that such competition doesn’t already exist amongst insurers. For instance, just recently we sent out a request for bids to medical insurers in the Southern Utah area. Within one week, we had eight proposals in our office—three national, four regional, and one local insurer(s). How many do we need before we think competition is sufficient to create maximum equilibrium?

To be honest, I think the real competition problem in the medical industry exists amongst the actual providers of the services that the insurers must pay in the event of a claim. For instance, when is the last time you called the hospital before making a visit to ensure that you were getting the best price and quality? If you are one of the few that does call, in the event that the advertised price seems high or quality seems low, is there even another provider of such service within the surrounding area (within fifty miles in most areas, 5 miles in the larger cities)? The answer is, probably not; and if so, perhaps just one other provider maximum.

With so few providers (low Supply), insurance companies will and do have a very difficult time negotiating better quality at lower prices because the providers know that no one else in town can do any better. Hence, medical service providers become monopolistic, insurers are forced to accept unreasonable service price contracts, and these insurers must pass-along to consumers higher premiums to cover the higher cost of potential service payment projections. Hence, if we can raise the number of service providers (Supply) in each area, such providers will be forced to lower service prices and improve quality in order to compete for patients, insurance companies will be able to negotiate much more reasonable service contracts, and these insurers won’t have to pass-along higher premiums to consumers and business because their potential service payments projections will be reduced significantly.

Accordingly, though subsidies and government restrictions and limitations mentioned in the referenced article may still be a factor, the combination of fierce competition amongst insurers and amongst the providers of services insured against by these insurers will result in a maximized equilibrium price for medical insurance consumers.

I know of no literature that tries to link a specific amount of healthcare costs to lack of interstate competition. I am sure it leads to some increased prices, but I'm not sure how much. Certainly I think that opening this up would illustrate for people how good or bad their state is.

There is an illustrative case of this with GasBuddy. This is a site that shows gas prices nationally - broken down by county. At that level, most of the differences are local and state taxes. This site made local and state governments look so bad when it came out about 5 years ago that there were motions in several states to have it banned. I think a similar sort of site for healthcare would open a lot of eyes.

This will definitely help with the rising cost of insurance. Another thing that one might consider is allowing more qualified service providers into the mix. This will not only increase the supply of insurance providers but the supply of the service providers. This needs to be done in increments so as to not flood areas and oversupply them with providers in either part.

By doing this, it will take away the monopoly on the service providers. They need to be allowed to come into the market and force competition among the current market share holders. They should do this with no help from anyone but the strength of their own company. It will be a slow process but everyone would benefit from it.